Remember The West End

The Kelo SCOTUS decision has got me thinking. It reminds me of two business stories I remember hearing growing up. They’re worth considering given the decision handed down.

It used to be that about 40 years ago, central Florida was mostly swampland and orange groves. Not worthless land to be sure, but certainly not the place that it is today. It was around that time that a certain developer took a liking to the area, specifically because it had an unusually large number of sunny days during the year. The developer was Walt Disney, and he had a vision for building a new theme park, a true destination that would be a world unto itself. Today, we know it as Walt Disney World.

To be sure, Disney had learned some valuable real estate lessons from his first theme park venture, DisneyLand. In constructing DisneyLand, Disney bought just enough land to situate his park, a parking lot, and a hotel on. And while at first his neighbors in Anaheim thought his venture was nutty, after a while it became apparent that it was not, that it was a stunning success. It was then that the value of all the land surrounding the park became enormously valuable. Today, DisneyLand is surrounded by hotels, restaurants and entertainment venues, on land that Disney couldn’t purchase if it wanted to. That was true in Walt’s time as well, so when he set out to build Walt Disney World, he decided to take a different approach.

Disney announced his plans to no one. He set up a number of dummy companies and shell organizations, to quietly buy up the land he needed over a number of years. Presumably, he would pay slightly more than the going rate to be sure he got the land instead of someone else, but he wasn’t paying extortionist prices because nobody knew it was him buying the land. Of course, eventually the secret leaked out, and Disney had to pay much more for the remaining land he needed to complete his project. Eventually, he acquired enough contiguous land to fit the entire city of San Francisco within it. And in 1971, his company opened Walt Disney World to the public.

A much different scenario took place in Boston around the same time. John Hynes was the mayor of Boston, and his developer friends, the Rappaport family, wanted to build a new housing development in Boston (they also wanted to build a bunch of new government buildings). They had envisioned a series of skyscrapers, enclosed within a gated community along the Charles River in Boston. The problem was, of course, that Boston being a 400 year old city had no contiguous tracts of land on which to build a whole series of skyscrapers. So the Rappaport family turned to their political connections, to obtain land by eminent domain.

Now Boston is divided up into “ends” much as Chicago is divided up into “sides”. The North End and the South End still exist. The West End is gone. Before Mayor John Hynes and developer Jerome Rappaport decided to raze an entire end of the city for private use, the West End was the sister neighborhood to the North End. Both were ethnically Italian neighborhoods, with the picturesque sort of brick row houses that one typically thinks of as Boston architecture. The West End faced the Charles River, while the North End faces the ocean. Not that it mattered. It was the age of urban renewal, and the old historic architecture had to make way for the 1960′s utopian vision of a gated community a-la Logan’s Run but without the dome. So the West End was condemned as blighted, and its citizens were forced from their homes.

I had been told by some Boston old timers that at the time, the standard practice for eminent domain was to declare a home or area to be blighted, in other words, worthless, and asses the value at $1 or some such low value (that apparently, that was how the Massachusetts Turnpike had been built). The owner was then left with the option of suing the city or state for a proper assessment, or just letting the government steal their property. And if you think about it, how many people would have the resources to take on city hall or the state house once their largest asset, the one they could most easily borrow against, has been stolen from them? Apparently, West End real estate owners were promised fair market value for their homes. In most cases however, the amounts paid barely covered moving costs. Renters were left with an average payment of $69 for their relocation troubles.

Today the North End is a bustling and vibrant part of the city of Boston. The real estate values have gone through the roof, as people enjoy living in the historic brick buildings that make up the area, and like living within walking distance to the downtown financial center. Moreover, the area has come alive with restaurants and nightlife. While New York’s Little Italy is evaporating, Boston’s North End is bursting at the seams. There is perhaps no better place in the country to get Italian food than in Boston’s North End. It is a tourist destination, an historic part of town, and one of the liveliest places within the city limits.

The place formerly known as the West End, on the other hand, is now known as Charles River Towers. Abutting Sturrow Drive, a major artery into Boston, the complex seems to mock the former West End residents by advertising itself with a giant sign that reads “If you lived here, you’d be home by now…” The towers themselves are moderately ugly, with tiny balconies that dot their sides all the way up into the sky. The complex, a series of several towers, is completely walled off to the rest of the city. There are no shops, no attractions for people to see, its gardens are private for residents of the complex only. But occasionally, ever so rarely, you’ll see a car with a bumper sticker on it that reads, “I remember the West End.” Indeed, we should all.

The lessons here should be obvious. Not just about the inability of government to predict which real estate projects will have greater future value and which will not, but about the ability to assess an accurate value on a piece of property absent market forces (assuming that the government doesn’t just decide to wholesale screw people as it did in the sixties, assessing properties at $1). The problem is that the very act of planning, of announcing plans, affects the price of land in a given area. Disney’s announcement sent the prices up in Florida. Similarly, had the developers in New London announced a desire to buy all the land that they needed for their development, prices would have risen there too. In fact, rising prices is exactly what would have convinced many to vacate their homes for the new development.

The issue in Kelo is not whether or not developers could have undertaken such a large-scale project in New London, but whether or not they could afford to do it at market prices. Evidently, they either couldn’t or felt that it would be cheaper to use government fiat instead. But the idea that the development couldn’t otherwise happen is rubbish. If you want proof, I can point you to a San Francisco sized theme park in central Florida.

Consider also, the fact that in an eminent domain taking, the opportunity for competitive bidding is eliminated from the assessment consideration. Imagine for a moment that the developers in New London decided to go the Disney route instead of the eminent domain route. They could have bought up land over time, and developed it as they saw fit when they had acquired enough. But perhaps that timeline is too long for these developers, so instead they make a public offer to all the residents of the area for their homes. They announce that they’ll pay an X% premium over the current market value, contingent on everyone selling, and perhaps with a deadline on the offer. That would enable the residents to band together, and to collectively bargain with the developers. They could solicit competing bids from alternate developers with different visions of what should be built there. And in the end, they would have the opportunity to determine a real market value for the land.

It is impossible, however, for a government to determine what that real value would be without letting market forces do their thing. That’s why this is a real violation of the eminent domain clause of the constitution. Because when transferring private property from one private owner to another private owner, it is impossible to determine what the real market value of the land would be. And therefore, determining just compensation becomes impossible.

Neal Bortz gets it right (though I have issues with other parts of his essay):

Considering this ruling, how likely are you to invest in real estate at this point? If you saw a tract of land that was placed squarely in the path of growth, would you buy that property in hopes that you could later sell it for a substantial profit? I wouldn’t. I wouldn’t be interesting in investing in that property because I know that when it came time to sell, the potential purchaser would lowball me on the price. I would never get a true market value based on the highest and best use of that property. And why not? Because the developer wanting that property would simply tell me that if I didn’t accept his lowball offer he would just go to the local government and start the eminent domain process.

In the West End, the city of Boston auctioned off the land it had taken, after having paid “market price” for it. How they managed to perform that feat, determining market price before the auction took place, is beyond me. In fact, it’s simply not possible. What they did was pay for the land a price that assumed the land would be used for the same purpose it was being used for, and then sold it to another developer at auction. Which would normally be fine between private parties. But when the government forces the hand of one party, they are denied their opportunity to auction, to gain the highest price. Therefore, it is de facto theft.

Consider also, that pricing is decidedly not an issue when eminent domain is properly used. When the government takes land for a road, they are effectively erasing the market value of the land entirely. And therefore, there is no competing interest that may pay higher for it. In that instance, paying the current market rates for the property assuming it retains its current use is entirely appropriate, if only because there really is no other way to do it.

I think we may be in for some real estate havoc with this ruling. Time will tell, but autocratic municipal rulers may be undertaking massive urban renewal plans before you know it. Municipalities (at least in the Boston area) lose money on every new family that moves into town, due to the exorbitant cost of schooling the children. Towns thought of as wealthy around here are leaving their roads potholed and unpaved, for lack of funds because the schools ate them all up. Municipalities had been doing all they could to discourage new residential development, including enacting minimum lot sizes and moratoriums on teardowns. They also give tax breaks to seniors inclined to move out of town so that new children won’t move in.

Now SCOTUS has handed these municipalities a new weapon in their fight to keep their budgets in line: the bulldozer. Simply bulldoze your poorest residents and get them out of town, and put in a giant box store instead. Now you’ve replaced a series of property owners who were a net drain on the town, namely families, with one that actually pays taxes into the town, a store.

Welcome to the new America. You live here. You’re home now.

How do you like it?

Remember the West End.
(click here here for some rather disturbing before and after arial photos)

Update: It appears that great minds are thinking alike on this one. Howie Carr has written a column that appears to use the same metaphor (subscription only, so i can’t say I’ve read it).

Update 2: The Globe is on the same page here too.

 
 

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